Case study: a newly minted pharmacist and a signing bonus

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confettiflyer

confettiflyer

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Okay, for all the financial gurus of SDN, please chime in with your advice. I'm in a (not so) similar situation, but obviously I'm not a pharmacist yet and my "windfall" isn't even that big. But for the sake of education, I'm starting this thread in case any new pharmacists generally fit the description below.


A 26yo RPh presents with a $10k signing bonus from a retail chain which will pay $54/hr and will guarantee 40 hours/week and full benefits next month. The chain has a 401k match of 1:1 (up to 6% of salary) which vests after 1y. The signing bonus is revocable with interest if the RPh leaves before the year is up.

Income:
$6k -- take home pay (estimated 70% of gross if you're wondering)
--> deductions included are: all pertinent taxes, 6% to 401k, medical/dental/vision.

Assets:
$500 in a high yield savings account
$2000 in a Roth IRA
$2500 in a 401k from a previous employer, currently in a targeted retirement fund.
TOTAL: $5k

Liabilities:
$85k in federal student loans @ 6.8%
$8k in credit card debt @ 12.99%
$4k in credit card debt @ 18.99%
$15k car loan balance @ 3.99% (48mo term, 36 to go)
TOTAL: ($112k)

Monthly expenses:
$450 -- car loan
$250 -- credit card payments (minimum)
**student loans in grace period**
$1000 -- apartment rent (shared with friend)
$800 -- food, gas, entertainment
TOTAL: $2500/mo

General comments:
The RPh wants to take a vacation before starting the job, and would love to use the signing bonus to do this. Also, you notice on the RPh's list of priorities, they are looking to save money for a down payment on a home (local median: $300,000) and would also like to buy a new laptop ($1k) and send his parents on a cruise ($3k). RPh reports not knowing much about investing or money in general, but has been taught to avoid debt whenever possible.

RPh has a current long term girlfriend with no plans to marry. The gf will contribute 50% of the home down payment. Otherwise, these finances are separate.

Based on the above information, what plan would you recommend that will maximize the financial health of the RPh while helping achieve some or all of his state goals. Specifically, what should the new RPh do

1) with the $10k signing bonus (in whole or in part)
2) with the RPh's net income after expenses


Note 1: I uber simplified this for readability, so I had to knock off a few details that would present in the "real world."

Note 2: If there's something HUGE that I forgot to put in that would affect your advice, just post a reply and I'll add it in. I tried to best approximate a real life situation a new RPh would encounter. Again, this is for illustrative purposes only...I used "confettiflyer magic pixie dust" to arrive to some of these figures.
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awesome thread.. I can't wait to see the responses.

Do you know what your student loan payment will be? How long is the grace period?
 
NormalSaline said:
awesome thread.. I can't wait to see the responses.

Do you know what your student loan payment will be? How long is the grace period?
Click to expand...

Let's say... 3 months left on grace period (it's been 3 months since graduation). According to a random online calculator, a 20 year repayment schedule (which is extended beyond the default 10) indicates a $625.94/mo repayment.

10y payment would be $943.
 
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confettiflyer said:
1) with the $10k signing bonus (in whole or in part)
2) with the RPh's net income after expenses
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1) Use the bonus to take a short trip like to vegas. Use the rest to pay off his credit card debt since the interest rate is pretty high. Also, make sure he gets the bonus before Jan because his tax rate would still be low. After Jan, it would be included in the year when he start to work as a pharmacist and therefore, he would be in a higher tax bracket.

2) I say since he is still young, he can take more risk. The stock market is terrible right now but most likely it will get better over the years so although it is risky, it can be very rewarding.

He should also consolidate his student loan if possible after July when the new low rate comes into effect.
 
this is actually a great thread b/c it can relate to a lot of us

but yeah...those credit card debts are ridiculously high
 
You need disability insurance. That is a no brainer and is to be done w/o question.

Next get rid of the credit card debt.

DO NOT charge more than you can pay each month.

Next, set up a realistic budget that accounts for all of your expenses:

Missing items:


  • Disability insurance
  • Phone bills.
  • Renters/home owners insurance
  • Car Insurance
  • Are utilities included in the rent?
  • Cable TV
Then you can see what your real excess is.

Next you need to build up a reserve that will account for 90-180 days of your net income.

Finally, remember stocks have outperformed every single investment over a 25 year period since 1929. But your window is less than 25 years to buy a house. So I would say, take the risk in your retirement plan and put your money into cash and CD's until you get your cushion and your down payment. Then you can re-evaluate.

Just one more thing, why would you buy a house with someone you are not going to marry. That's going to lead to a real mess one day.... If you are serious, I would live off of your salary and bank her salary completely. Then you will save much more quickly....
 
Pay off credit card loans definitely. By paying them off, you are getting a return of 12.99 percent and 18.99% already. The case study should call up their company RIGHT NOW and demand a lower interest rate. Most credit companies would automatically do it if you are a long time customer and always pay on time. After that, be sure to ask to speak to the manager to make sure you are getting the best deal. Kindly remind him that there are a lot of better offers out there and that you want to stay with them. The rate 18.99% rate should be reduced to at least 14 percent if not more, and 12.99% to 9.9 percent. I have saved my friends a lot of money in interest payments through this method.

In addition, by paying the bad debts off, you also increase your credit score by a lot of points due to your better debt/income ratio. This will save you a lot of money when it comes time for you to mortgage that house.


With your net income, I would probably put the majority of it in investments now. The stock market is so cheap with a lot of good companies out there. I recommend LDK (Solar company), CVS, GPS (Gap), and a few more.

For your goals, wait until you get your tax return. 1k for a laptop seems a lot unless you are a gamer. 3k for a vacation can get you a lot now with the global economy the way it is.
 
Old Timer said:
...
Just one more thing, why would you buy a house with someone you are not going to marry. That's going to lead to a real mess one day.... If you are serious, I would live off of your salary and bank her salary completely. Then you will save much more quickly....
Click to expand...

Great advice. So much for this guy having oodles of free cash.

I set up the case and kept them single because, had I made our hypothetical RPh married, I would have had to include the corresponding financial picture of the spouse. For simplicity, let's assume RPh and girlfriend are 100% going to marry after 5 years (at that point, this guy better get a new financial plan) and her only contribution at this point is 1/2 the down payment.
 
You NEED to pay down that credit card debt. Everything else (car loan, student loans) are expected expenses for a new grad. If you want to get a good rate when you do have the money to get a house, you are going to have to get rid of the major debt on credit cards to get a good rate. Its just like throwing money away with those high rates. Demand a lower rate or transfer balances to a card with lower rate.
 
Double check the Roth IRA, I believe you're either going to make too much to contribute at all or too much to contribute fully.

Call up both credit card companies and ask for a lower rate immediately. If they balk, threaten to cancel. Remind them that you just graduated and what your new income is. Once this is done simply pay down whichever debt has the highest interest rate.

RPh has a current long term girlfriend with no plans to marry. The gf will contribute 50% of the home down payment. Otherwise, these finances are separate.
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Is the 50% a gift? Are you going to be paying her back? Is she paying rent? Who's name is the house in? The rest of your post seemed perfectly sensible but this is a huge, huge pitfall. Like Grand Canyon sized pot hole and you're driving a Yugo. If you insist in going this route, talk to a lawyer, get things in writing and know your rights.

edit: And don't assume you're going to get married in 5 years, assume you're going to be single for life and plan your finances accordingly.
 
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With the max amounts set nowadays, you will not get 85k in federal loans.

Think more of 30k or so in federal loans (+ whatever you incurred before coming to pharm. school) and the rest in private loans at variable interest.
 
bacillus1 said:
With the max amounts set nowadays, you will not get 85k in federal loans.

Think more of 30k or so in federal loans (+ whatever you incurred before coming to pharm. school) and the rest in private loans at variable interest.
Click to expand...

I know...it'll be a combo of stafford (6.8%), Grad PLUS (8.6%-ish), and maybe private loans beyond that. Again, for simplicity, I lumped it all as "student loan" ala "Suze Orman" call-in.
 
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I think Old Timer was the only one who mentioned this, but my first bit of advice is to beef up RPh's high yield savings account. It's sitting at $500, I'd actually stick all of the $10k bonus into savings minus a $1500-$2k vacation.

Any excess money he has will go toward paying down credit cards at the end of the month (highest rate card first). This guy needs a hefty emergency fund in case a) he gets fired for whatever reason, b) he decides to leave before the year is up or for other reasons and needs to pay back the $10k (dumb move, might as well stay a year).

This part might not apply next year...but one could argue that CC's could be an "emergency" fund of sorts, but then I would argue that with all the balance chasing going on, CC's are no longer a reliable safety net. He'll be able to pay off his cards in due time, and so the interest paid won't be too bad.

Now more than ever....liquid safety account ftw!
 
1) roll previous employers 401k into roth ira
2) contribute up to match of new employers 401k then start roth ira in 2010 (income limit lifted in 2010 for roths) then if money is left for saving max out 401k and pay down debt on credit cards (in the mean time try to transfer credit card debt to 12 months no interest card offers and split payments into monthly portions)
3) get a subscription to money or kiplingers
 
confettiflyer said:
1) with the $10k signing bonus (in whole or in part)
Click to expand...
I would take the sign on bonus in the calendar year before licensure, so your income would be much less and you'd get most back...then use all of the bonus, including tax refund assuming you get it, to pay credit card debit.

confettiflyer said:
2) with the RPh's net income after expenses
Click to expand...
Contribute to the max of 401K for at least 10 years, pay off the rest of the credit card debt, and save $5,000 and put into money market for a rainy day. I suggest saving another 10% and putting it in another type of account with less market volatility for the near future.

Pay off student loans and car in time frame agreed to. Spend a little money on things you like.

confettiflyer said:
Monthly expenses:
$450 -- car loan
$250 -- credit card payments (minimum)
**student loans in grace period**
$1000 -- apartment rent (shared with friend)
$800 -- food, gas, entertainment
TOTAL: $2500/mo
Click to expand...
You spend $1000 a month in rent? Wow, where do you live? That's a mortgage payment in a lot of places for a house.
 
confettiflyer said:
Assets:
$500 in a high yield savings account
$2000 in a Roth IRA
$2500 in a 401k from a previous employer, currently in a targeted retirement fund.
TOTAL: $5k

Liabilities:
$85k in federal student loans @ 6.8%
$8k in credit card debt @ 12.99%
$4k in credit card debt @ 18.99%
$15k car loan balance @ 3.99% (48mo term, 36 to go)
TOTAL: ($112k)


General comments:
The RPh wants to take a vacation before starting the job, and would love to use the signing bonus to do this. Also, you notice on the RPh's list of priorities, they are looking to save money for a down payment on a home (local median: $300,000) and would also like to buy a new laptop ($1k) and send his parents on a cruise ($3k). RPh reports not knowing much about investing or money in general, but has been taught to avoid debt whenever possible.

RPh has a current long term girlfriend with no plans to marry. The gf will contribute 50% of the home down payment. Otherwise, these finances are separate.
Click to expand...

Just to be sure - the above pharmacy student is broke! Broke, as in, has no money. Having a negative net worth of $107,000. The only thing this pharmacy student should be focusing on is getting out of debt and increasing his net worth to at least zero.
All of his other short term goals should be put on hold. He can not afford a vacation, a cruise for his parents or a laptop right now. Sorry, these are things broke people should not be buying. And this student has no money. Sure he has a sign on bonus, but that doesn't mean he has money - because he already owes more than 100k!
Again, this student needs to focus all of his financial energy into getting out of debt asap after getting his job. Forget investing and other spending until then.
Why make the banks super rich with interest payments????
 
tlh908 said:
Just to be sure - the above pharmacy student is broke! Broke, as in, has no money. Having a negative net worth of $107,000. The only thing this pharmacy student should be focusing on is getting out of debt and increasing his net worth to at least zero.
All of his other short term goals should be put on hold. He can not afford a vacation, a cruise for his parents or a laptop right now. Sorry, these are things broke people should not be buying. And this student has no money. Sure he has a sign on bonus, but that doesn't mean he has money - because he already owes more than 100k!
Again, this student needs to focus all of his financial energy into getting out of debt asap after getting his job. Forget investing and other spending until then.
Why make the banks super rich with interest payments????
Click to expand...


THis is David Ramsey's advise. Does dave ramsey tells you not to buy a house until you get out of debt? I am not sure. But if you can get a house and your mortgage payment is around 1000 or even a little more wouldn't that be good advise? Especially now because the housing market is low, wouldn't it be good advise to buy a house now?

I like the idea of getting out of debt but at the same time, i believe you need to enjoy life especially while your still single. Who knows what can happen tomorrow maybe you will die and if you spent the last 3 years only working and getting out of debt, and didn't take anytime for yourself then that would have sucked.

If you want to take an expensive vaction to Europe, then do it, especially now when you don't have a family and other responsibilities. I say buy your parents a vacation especially if that is important to you because later it may be to late and then you will regret that. Go on the cruise with your parents. Spend quality time with them, their is more to life then worrying about money and trying to become a millionaire as fast as possible.

I have paid for my parents to come out to visit me and we have spent quality time together and not something I regret even if it meant setting me back a few months in getting out of debt. I also am planning on taking them on a cruise and don't want to wait until I get out of debt because they are getting old and soon they might not be able to travel.

So yes you should try and get out of debt but you should also be happy and do what makes you happy cause life is short.
 
Best/Most creative thread I've seen in awhile... Thanks for this.

I'm brilliant in ALOT of areas.... finances is DEFINITELY not one of them. So maybe in 3 years after graduating I'll make a thread just like this one over again lol.
 
museabuse said:
THis is David Ramsey's advise. Does dave ramsey tells you not to buy a house until you get out of debt? I am not sure. But if you can get a house and your mortgage payment is around 1000 or even a little more wouldn't that be good advise? Especially now because the housing market is low, wouldn't it be good advise to buy a house now?

I like the idea of getting out of debt but at the same time, i believe you need to enjoy life especially while your still single. Who knows what can happen tomorrow maybe you will die and if you spent the last 3 years only working and getting out of debt, and didn't take anytime for yourself then that would have sucked.

If you want to take an expensive vaction to Europe, then do it, especially now when you don't have a family and other responsibilities. I say buy your parents a vacation especially if that is important to you because later it may be to late and then you will regret that. Go on the cruise with your parents. Spend quality time with them, their is more to life then worrying about money and trying to become a millionaire as fast as possible.

I have paid for my parents to come out to visit me and we have spent quality time together and not something I regret even if it meant setting me back a few months in getting out of debt. I also am planning on taking them on a cruise and don't want to wait until I get out of debt because they are getting old and soon they might not be able to travel.

So yes you should try and get out of debt but you should also be happy and do what makes you happy cause life is short.
Click to expand...

Your response makes no sense. Basically you are saying - ignore all your debt and spend however you want as long as you can make the monthly payments. Guess what - life is short but it also long (You have a much better chance living to 78 than dieing in the next 3 years)! Financial advise needs to be sustainable, not only for today but for the long term. You are giving advise to rob this persons wife and future kids of money so he can spend it today. Why spend marriage digging out of the hole created when single?

Read the Richest Man in Babylon. It predates Dave Ramsey.

There are plenty of people making $100k+ and who are still broke, so its your choice.
 
Delayed gratification, people!! Hate it so much when idiots went spending spree and say "I make 100k+/year and I still have no money"

Get rid of all of those debts... that's no brainer to keep them that high >_>

I saved up $40k already in 4 months and living dirt cheap and put the money in another country earning 13% interest rate. $400/month passive income is just nice.

My goal is to get it up to 100k-200k and just enjoy having 13% interest rate lol. That's $2k/month doing nothing!

Make the bank pay for you; not the other way...

Invest in stocks if you are young. Stocks performing on average 8% over the course of 25 years. They are quite stable now and hopefully we will see recovery in 2009-2010.
 
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At this stage, the only debt you should have is your student loan. Credit cards are gonna ruin you, so make your payments on time for those. There are times when I am willing to use my student loan money to pay off the credit card because it is more long term and has less interest.
 
Sparda29 said:
At this stage, the only debt you should have is your student loan. Credit cards are gonna ruin you, so make your payments on time for those. There are times when I am willing to use my student loan money to pay off the credit card because it is more long term and has less interest.
Click to expand...

Never a good idea to convert short term debt into long term debt.....
 
tlh908 said:
Your response makes no sense. Basically you are saying - ignore all your debt and spend however you want as long as you can make the monthly payments.
.
Click to expand...

No I am not saying that. You are saying live on ramen noodles until you get out of debt, can't there be some sort of comprimise?

Maybe his parents supported him a lot through college and he wants to buy them a cruise to say thanks? Your basically saying sorry mom and dad I am in debt from pharmacy school, can't do anything nice for you.

Whats wrong with someone who spent 8 years of their life educating themselves to go on a 3000 dollar vacation before they start working fulltime for the next 30 years?

Hes not making more debt by doing these two things, just delaying debt, and 6000 dollars is only 2 to 3 weeks of work. So if anything he is delaying his getting out of debt by 2 to 3 weeks what is the big deal if life is so long then 3 weeks is nothing to have a little gratification before you start your career?

I am not telling him to go out and buy a Lexus or a $6000 dollar TV.

Maybe the satisfication he would have by sending his parents on a cruise and spending quality time with them is priceless.

Why can't he spend his money on a cruise and vacation and then after that focus on getting out of debt, whats the big deal? Why does it have to be all or nothing?

You know what I've noticed is that a lot of people with money are the least giving, the last ones to pick up a check(infact they tend to give the least when spliting it up), and they tend to complain about not having enough.

I agree with focusing and try to get out of debt but I mean its not like he making 14 dollars an hour like most of the people that dave ramsey is giving advice too. Its ok to have a little fun too. Being the richest person in Babylon isn't the key to hapiness.
 
Yeah...be generous, but don't give away the store either. I mean, if you spend all your time/energy getting out of debt asap, who knows, your parents might be dead before you're able to finally get them a nice gift/vacation.

As for not a good idea converting short term debt to long term...I generally agree, unless someone happened to use CC's as a form of "long term" debt for solvency (ie those spending more than they take in for an extended period of time).

Reining in $10k of debt at 19% into 6.8% translates to real savings if the debtor intends to keep the debt for a long period of time, but the kicker comes if the situation sours and the debtor files for a BK. CC's can be discharged, student loans cannot. It's like paying off CC's with a HELOC, turning unsecured debt into secured debt. I'd rather have a jacked up FICO rather than get foreclosed upon.
 
Momus said:
put the money in another country earning 13% interest rate. $400/month passive income is just nice.
.
Click to expand...

more detail on this please
 
confettiflyer said:
As for not a good idea converting short term debt to long term...I generally agree, unless someone happened to use CC's as a form of "long term" debt for solvency (ie those spending more than they take in for an extended period of time).

Reining in $10k of debt at 19% into 6.8% translates to real savings if the debtor intends to keep the debt for a long period of time,
Click to expand...

Nothing or almost nothing you buy on CC will be worth anything in 10-30 years. It's not like it's going to take forever at the income level in this example to pay of the CC debt. You just do this first.
 
Old Timer said:
Never a good idea to convert short term debt into long term debt.....
Click to expand...

hey, you're such a proponent of disability insurance, I wonder if you could answer a question:

does it cover short term disability...ie a broken pelvis and a few weeks out of work? Or does it only cover permanent/long term disability?
 
NormalSaline said:
hey, you're such a proponent of disability insurance, I wonder if you could answer a question:

does it cover short term disability...ie a broken pelvis and a few weeks out of work? Or does it only cover permanent/long term disability?
Click to expand...

Usually your employer cover short term disability. But if you follow my plan, you will have a cushion to cover the time between disability and the time your coverage kicks in....
 
Old Timer said:
Nothing or almost nothing you buy on CC will be worth anything in 10-30 years. It's not like it's going to take forever at the income level in this example to pay of the CC debt. You just do this first.
Click to expand...

my bad i should have clarified that i meant pharmacy students/undergrads who don't have an income stream and where loans would cover other expenses anyway.
 
Old Timer said:
You need disability insurance. That is a no brainer and is to be done w/o question.

....
Click to expand...

When you say disability insurance are you talking about something other than the short term and long term you get through your work? If so please give me more info cause I am not doing it.
 
I agree about the long term disability insurance it can be a life saver. Besides what the company gives you, you can also purchase your own through AFLAC, Prudential and a ton of other companies. This is good especially for females planning to have children. The money received can easily replace the income you had if you get the right coverage. When I decided to have a kid, I actually had three long term disability policies, needless to say the money coming in was great!
 
tootoo30 said:
I agree about the long term disability insurance it can be a life saver. Besides what the company gives you, you can also purchase your own through AFLAC, Prudential and a ton of other companies. This is good especially for females planning to have children. The money received can easily replace the income you had if you get the right coverage. When I decided to have a kid, I actually had three long term disability policies, needless to say the money coming in was great!
Click to expand...

You can collect long term disability for having a kid? Do women pay more than men? Can you collect then on say cosmetic surgeries and optional things like that? Doesn't seem right if your employler already has maternity leave pay that you can collect disability too. Can you collect on more than one long term diability plan if so couldn't you actually get more than what you were making? I dunno I am clueless to this stuff.
 
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museabuse said:
You can collect long term disability for having a kid? Do women pay more than men? Can you collect then on say cosmetic surgeries and optional things like that? Doesn't seem right if your employler already has maternity leave pay that you can collect disability too. Can you collect on more than one long term diability plan if so couldn't you actually get more than what you were making? I dunno I am clueless to this stuff.
Click to expand...

There are limitations on what is covered under long term disability. Your employer will only pay you a portion of your salary, something like 66%, so without your own long term disability you will not be getting alot of money every month. Alot of things can complicate a pregnancy, which could require you to stay home longer than the 12 weeks that FMLA gives you so long term disability is a must for women. I don't know how much men pay compared to women, you may want to check with some companies for that answer.

HTH
 
I tried to sign up for supplemental disability (my employer plan ((through Metlife)) already covers 60% of base salary) and I was rejected! I pay for my LTD post tax so if it ever kicks in my payment checks are not taxed... so they said that was more than enough money and they (Metlife and Guardian) denied me additional coverage

:-( has this happened to anyone else? should I be shopping around to other companies or be satisfied that this is the best I can do?

Thanks!
 
MdBrndPhrmcst said:
I tried to sign up for supplemental disability (my employer plan ((through Metlife)) already covers 60% of base salary) and I was rejected! I pay for my LTD post tax so if it ever kicks in my payment checks are not taxed... so they said that was more than enough money and they (Metlife and Guardian) denied me additional coverage

:-( has this happened to anyone else? should I be shopping around to other companies or be satisfied that this is the best I can do?

Thanks!
Click to expand...

You need to get an agent who will shop companies for you.....
 
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